Packages travel on a conveyor at the Amazon's fulfillment center in Robbinsville, New Jersey, U.S., November 27, 2023. REUTERS/Mike Segar
Feb 6 (Reuters) - Amazon shares dropped 8% in premarket trading on Friday after the company's hefty capital expenditure plans deepened investor worries over Big Tech's spending spree on artificial intelligence.
Massive AI spending by companies - estimated to be more than $600 billion this year - have raised doubts among investors over the prospects of immediate returns from the huge capital outlays.
They also fear that rapidly improving AI tools could eat into demand for traditional software, squeezing profit margins, resulting in a broader selloff across the tech sector.
Amazon's capex spending plans are expected to reach $200 billion in 2026. Alphabet said its capex could double from a year ago, while Meta and Microsoft has ramped up their spending plans.
"While the rising capital intensity is not a surprise directionally, the magnitude of the spend is materially greater than consensus expected," MoffettNathanson analysts said in a note.
In contrast to Alphabet's confident tone on its spending plans, Amazon CEO Andy Jassy struck a defensive note during the post-earnings investor call.
"As a reminder," said Jassy, referring to the results of cloud platform Amazon Web Services, "it's very different having 24% year-over-year growth on $142 billion annualized run rate, than to have a higher-percentage growth on a meaningfully smaller base, which is the case with our competitors."
AWS revenue grew to $35.6 billion in the December quarter, while Google Cloud grew 48% to $17.75 billion. Microsoft's Azure surged 39% in the same period.
"We do not think they would be spending $200B in FY26 if they did not have the appropriate demand signals, but the margin of error is shrinking," MoffettNathanson analysts said.
At least five brokerages have reduced their price targets on the stock following results. Amazon trades at a price-to-earnings ratio of 27.01, compared with Microsoft's 21.62 and Alphabet's 28.36.
(Reporting by Kanchana Chakravarty in Bengaluru)
